Santos deal a potential fly in the Warrego ointment

Company News

by Glenn Dyer

Was the Santos (ASX:STO) announcement on Wednesday that it had struck a new gas supply deal in WA a step up in the battle for control of Warrego Energy and the 50% stake it holds in the huge West Erregulla gas field in the Perth Basin?

At present Gina Rinehart’s Hancock Energy has won the battle for control of Warrego with a cash offer of 28 cents a share, but not all of Warrego could end up being snaffled in that offer.

Strike Energy, the other 50% owner of West Erregulla field – has struck a deal with certain unnamed Warrego shareholders that will give it an effective 19.9% stake, enough to prove to be an irritant to Hancock’s future ambitions.

Hancock beat out the Kerry Stokes-controlled Beach Energy which owns 50% of another big gas field, Waitsia – the other half is held by Mitsui of Japan which is overseeing the $700 million plus first stage development of the field – if a new contractor can be found to replace the bankrupt Clough group.

Why the Santos deal could be part of this increasingly arcane battle is because of the agreement Strike Energy has with Santos to sell gas from the Walyering field in the Perth Basin.

Strike owns 55% of Walyering and Talon Energy has the other 45%.

Santos said it will purchase a total of 36.5 petajoules of gas from the Walyering field over five years, commencing in the first half of 2023.

“The agreement is facilitated by Santos’ existing customer relationships and pipeline transport positions, with gas to be delivered into Santos’ WA domestic sales gas portfolio,” Santos said.

Santos CEO Kevin Gallagher said Santos continues to support Western Australian industry through the delivery of competitively-priced domestic natural gas.

“We are delighted to sign this agreement with the Walyering joint venture and bring this gas to market in a timely manner, reinforcing our position as WA’s biggest supplier of domestic gas,” Mr Gallagher said

In its statement, Talon revealed more than Santos did – such as the contract “includes tranches of firm gas volumes, which are contracted on a “take or pay” basis, and “as available” gas volumes, which provides the JV with the flexibility to supply additional production into the contract as the field ramps up towards its maximum production capacity.”

“Santos has an established domestic sales gas portfolio in Western Australia and this collaboration enables the JV to bring Walyering’s gas production to market in a timely manner, and on attractive terms. The agreement is US-dollar denominated and linked to escalation in US CPI.

“The gas supplied under the contract will be sourced from the Walyering gas field (EP447), where the JV is constructing a low-cost gas processing facility and associated infrastructure, with gas production being delivered into the Parmelia Gas Pipeline,” Strike said.

Details of Walyering in the past have put a life of 10 years on the field.

This deal will be cheaper for Santos to continue meeting the gas reservation demands of the WA government than spending more money on finding old or new fields or areas or deciding to go ahead with the $US2 billion plus Dorado oil and gas project off the NW WA coast.

Santos delayed a final investment decision on the project earlier this year because of rising costs and a shortage of labour.

The Walyering deal came as a surprise and Santos obviously needs the gas to maintain its share of the domestic WA market and to keep the WA government happy that its 15% reservation share was not going to leak away.

If Santos had not needed the gas ASAP it would not have struck a contract with Strike and Talon who are spending around $15 million on bringing Walyering into production.

The Santos contract makes the project bankable and the two companies will generate enough cash flow to repay interest and debt and even do more work in the area.

It also gives Strike access to a source of cash to help pay for its 50% stake in any development of West Erregulla and to continue its 20% stake in Warrego and irritate Hancock Energy.

Strike could also do a deal with Hancock and get a carried interest in any development of West Erregulla. It also positions gas from West Erregulla to be sent north for export out of the NW Shelf LNG trains used by Santos or Woodside via the Dampier to Bunbury pipeline.

Santos shares hardly moved yesterday – they were up 0.8% at $7.16. Strike shares bounced more than 6% to 36.5 cents and talon shares traded 3% higher at 16.5 cents.

And Warrego shares were steady on 29 cents, just a cent above the Hancock Energy bid and an indication that some investors reckon there is more to come in this story.

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